How to skin your debt
Nearly every adult in the U.S. is in debt to some degree—probably because getting into debt is just so fun and easy to do.
Getting out of debt? Not so much.
It’s a hassle that often requires spreadsheets, and you don’t want that. Nor do you appreciate all the creditors caterwauling to be paid.
Join SAFE Cents host Mark (and a cat he named ‘Credit Card’), as he teaches you a much easier way to pay off your debt without all the trouble.
- Consolidate Your Debt: a Video Summary
A kitten is a lot like the credit debt you have when you’re first starting out. As a matter of fact, let’s just name him ‘Credit Card.’
Right now, Credit Card is cute and cuddly and manageable. It’s like having your first credit card with a $500 limit and a monthly payment that’s totally doable.
The problem is that over time, you’re likely to add to your credit debt. Another credit card, or two. Some medical bills. Overdue utility bills. Maybe a tax payment. And before you know it — Yeah. Every try herding cats?
And, like kittens, your credit debt has a tendency to grow bigger. Like, a LOT bigger.
That’s what it feels like to have too much debt from too many creditors. Here’s what it usually looks like:
Let’s say you owe $10,000 to multiple creditors, and you’re paying the monthly minimum to each of them.
Different creditors. Different due dates. Different amounts to pay. That can get stressful. And it only gets worse from there.
Using the average national interest rate, you could be around $1,500 on that $10,000 every year — just in interest.
Yet, the amount you still owe never seems to REALLY go down.
Luckily, there’s a solve for too much credit debt. It’s called ‘Debt Consolidation’.
With debt consolidation, you’d combine the $10,000 of credit debt you owe into a personal loan likely with a much lower interest rate.
Instead of making five or six different payments to all those creditors, you’re making ONE payment. And, very possibly, a lower one.
And in most cases, you actually pay off that debt while saving thousands of dollars in interest payments — even more, if you keep paying the same amount you paid before consolidation.
And if you’re wondering where you might get that personal loan...We may know some people.
So, to recap: debt consolidation: One payment, often at a lower interest rate, with less interest charges.
Or, you could keep trying to herd cats.
Try out SAFE Federal Credit Union’s debt consolidation calculator at our Learning Center.
Let’s Start Skinning Your Debt
Most Americans find themselves in credit card debt at some point in their lives. If you’re feeling overwhelmed, or you’re having trouble juggling multiple cards and payments, you need to start skinning your debt.
Method One: Debt Consolidation
Debt consolidation seems to have gotten a bad rap, but it’s really just transferring debt to one source. Why would you do such a thing?
Well, first and foremost, a lower interest rate means paying less in the long run. If you need proof, our credit card payment calculator makes it easy to see how drastic the difference is.
The second benefit is a little less obvious but it’s still a big one: transferring your debt to one company means that you have one payment to make each month, one due date to worry about, and one creditor to appease. If something happens and you miss payments, it’s a lot easier to work with one creditor instead of multiple to figure out a fix. And, if you only have one payment and one due date, you’re less likely to miss that payment because it slipped your mind.
You can consolidate your debt in one of two ways: Take out a personal loan and use it to pay off your credit cards or transfer your debt to one single credit card.
Take out a personal loan
Personal loans generally offer low rates and a fixed term, making them an attractive prospect for consolidation.
If you have an average credit card APR of 24.06%, $10,000 in debt, and pay $200 a month towards your debt, you may spend more than 10 years paying it off. Using those same numbers, but with a personal loan at 8.99% APR, you’ll be paid off in 63 months.
Personal loans typically have higher borrowing limits than credit cards, meaning you may be able to consolidate more debt into a single payment. On the other hand, they’re unsecured loans (meaning you’re not putting up collateral to get the loan; the lender is looking at your borrowing and payment habits among other considerations), so your credit score has a higher impact here.
Use a more favorable credit card
If your credit score isn’t the best, condensing all your debt onto one credit card could be a favorable option for you. Even if you have a great credit score, using a credit card can have its benefits.
While both personal loans and credit cards have a payment minimum, a personal loan’s minimum is going to be a lot higher because it’s a fixed term. A credit card’s minimum payment is will fluctuate, but it’ll generally be lower because it’s based on a percentage of your balance without a fixed term, which keeps your monthly payment relatively low. If you have an uneven paycheck because of shift work or you’re worried about financial emergencies, that flexibility could be important.
A lot of credit cards, SAFE’s credit card included, have introductory offers allowing you to transfer your debt at a lower rate than usual. Some cards will make this offer periodically throughout the year as well. If you can catch one of these promotions, it may be worth moving your debt to a single card. Make sure you’re aware of the transfer APR, though. The rate on a credit card balance transfer is generally higher than the purchase rate, so make sure you’re comparing apples to apples.
Side Note: Credit cards may get a bad rap, but they’re not inherently bad. If you have good spending habits, credit cards can be a great asset to have in your back pocket…or your purse, or wherever you keep your wallet.
Method 2: Debt Counseling
If you don’t qualify for a personal loan or a better credit card rate, or if you just don’t want to go that route, there’s still hope.
You can start with financial counseling, which SAFE offers for free. While we have a number of services, our Remedial Counseling was developed for those amid financial difficulties to help them manage their debt. Together, we'll take a close look at your finances and help you develop and stick to a household budget by making smart spending decisions.